The decision to transfer out of a final salary pension scheme is complicated, says Philippa Hann, so here she outlines eight ‘red flags’ that can be causes for concern in the case of a defined benefit (DB) transfer
The Clarke Willmott solicitor has been representing British Steel workers in their battle to receive compensation from the Financial Services Compensation Scheme (FSCS) for advice they received in 2017 before they transferred out of their DB British Steel Pension Scheme (BSPS).
In a bid to secure what she considered fair compensation for her clients, Hann, alongside Echelon Wealthcare managing director Alistair Rush, who has been instrumental in helping the steelworkers, took the fight all the way to Westminster.
Initially, Hann and co asked the FSCS to examine the discount rate used by the lifeboat scheme to calculate compensation, as well as at the advice fees paid by the steelworkers and the FSCS’s take on the value of the workers’ pension pots.
It has since emerged the FSCS has decided to use an up-to-date transfer value to calculate the steelworkers redress and has chosen partially to compensate the men for their ongoing adviser charges. The scheme said, however, it would not reduce the discount rate used to calculate the redress, arguing it must treat all applicants equally whether they transferred from the BSPS or another final salary scheme.
Here Hann highlights eight ‘red flags’ that can be causes for concern in the case of a defined benefit (DB) transfer.
- No knowledge of where the money is going
“The advice should include where the transferred money should be invested,” says Hann. “This means the actual investments themselves – not simply the self-invested personal pension (SIPP). Where the advice on where the money should be invested differs from where the money is actually invested is a cause for concern.”
- Low fees
“The advice should also take into account the fees which will be payable from the pension investments,” Hann continues. “Where the advice lists different – particularly lower – fees to those which are actually being charged, then this should be a cause for concern.”
- No rates of return explained
Hann also believes the transfer advice should explain the rates of return needed to match the benefits being given up and take into account the fees and charges that will be paid out of the pension along the way. “Where it is not made clear to clients how the fees and charges payable from their pension will affect the amount the pension pot will grow or fall,” she argues, “then this should be a cause for concern.”
- No idea of client’s income and outgoings
She also says the adviser should understand what income the client needs in retirement: “Where the client did not have a detailed discussion about what their outgoings might be – for example, food, utilities, council tax, holidays, for example – then this should be a cause for concern.
“And where the final salary scheme was needed to provide this income – in other words, where the client had little or no other pension provision – then this is a major cause for concern.”
She continues: “The decision whether to transfer out of a final salary pension scheme is complicated and the starting point of any advice should be that the client should not transfer. So, in addition to the above, if phrases like ‘no-brainer’ were used during the advice process, then the advice should be checked. The regulator requires that the advice to transfer should be clearly in the client’s best interest. Borderline cases will not meet this test.”
Hann also points out four other red flags to watch out for, warning that, if the stated reason for the transfer is any of the following, with no other clear reason to transfer, then “the advice may be dubious at best”:
- The client wants more flexibility to invest
- The client wants his or her family to benefit from the pension on their death (without any discussions as to how life assurance might meet this need)
- No discussions about the possibility of running out of money
- The desire to retire early without an explanation of how that could be achieved while staying in the final salary scheme